Report Information - Report Title: "Beware of the Risk of RMB Appreciation" - Research Institution: Huatai Futures Research Institute - Date of Publication: September 5, 2025 [1] Investment Rating - No investment rating for the industry is provided in the report. Core View - The report warns of the risk of RMB appreciation. The current economic expectation differential favors the RMB, the Sino-US interest rate differential is neutral, and trade policy uncertainty is also neutral. In the short term, the USD/CNY is expected to fluctuate between 7.1 - 7.2, while in the medium to long term, attention should be paid to the appreciation resistance range of 6.9 - 7.0 [32][35]. Summary by Directory 1. Quantity and Price Observation - The implied volatility curve of the 3-month USD/CNY option shows an appreciation trend of the RMB, with the put-side volatility higher than the call-side [4]. - The policy counter-cyclical factor has returned below 5%, and the 3-month CNH HIBOR - SHIBOR spread has fluctuated [10]. 2. Fundamental and View Macro - Interest Rate Cuts and Liquidity - There is a divergence in the pricing of interest rate cuts between the US and Europe. The TGA account had a balance of $595.7 billion on August 27, the Fed's reverse repurchase balance was $34.7 billion, and the reserve balance of depository institutions was $3.34 trillion (-$56.6 billion). Powell's speech at the global central bank annual meeting on August 22 turned dovish [17]. Core Chart - US Economy - US employment authority has declined, with a significant downward revision of non - farm payrolls in July. Inflation from tariffs is not significant, and economic expectations have been revised upwards, with fiscal spending rebounding and the August economic outlook showing resilience [19]. Tariff Events - In the trade negotiations between the US and 17 key countries and regions, there is a "gradient implementation." Some agreements have been reached, but many are still in the negotiation stage. The US has also adjusted tariff policies on various industries, and on August 29, the US Court of Appeals ruled that most of Trump's tariff policies were illegal [20][21]. China's Economy - In July, China's exports and consumption showed resilience, but inflation did not rebound, and fixed - asset investment faced pressure. In August, the national PMI was 49.4, with production, new orders, and other indicators showing different trends [22]. Macro - Scenario Deduction - Different time windows are affected by various factors such as domestic policies, Fed policies, inventory cycles, and tariff impacts [30][31]. 3. Overall View - The current economic expectation differential is favorable for the RMB, the Sino - US interest rate differential is neutral, and trade policy uncertainty is neutral. In the short term, the USD/CNY is expected to fluctuate between 7.1 - 7.2, and in the medium to long term, attention should be paid to the appreciation resistance range of 6.9 - 7.0 [35]. 4. Risk Assessment - The range of the basis fluctuation of the futures main contract from January 2022 to the present is between - 1100 and 900 [36].

Core Viewpoint - The discussion around whether the RMB/USD exchange rate will break the "7" level is increasing, with analysts suggesting that multiple factors will influence this outcome, including the China-US interest rate differential, the willingness of holders to convert currency, and the RMB central parity rate. Overall, the probability of breaking 7 in the short term is considered low [2][3][4]. Group 1: Exchange Rate Trends - In the last week of August, the RMB appreciated significantly against the USD, reaching a high of 7.1260 on August 29, the highest since November of the previous year. Despite a slight pullback in September, the RMB has appreciated over 2100 points, or nearly 3%, from its low of 7.3506 in early April [2][3]. - The RMB's performance in 2023 has been volatile, with initial appreciation in a weak USD environment, followed by depreciation due to concerns over global trade after the announcement of US tariffs in April, and subsequent recovery after high-level China-US economic meetings [2][3]. Group 2: Influencing Factors - The recent rapid appreciation of the RMB is attributed to a combination of the Federal Reserve's policy shift, domestic policy guidance, and market sentiment. The Fed's hints at potential interest rate cuts have created a favorable external environment for RMB appreciation [3][4]. - The RMB's exchange rate against a basket of currencies has shown a decline of 4.8% since the end of last year, with the CFETS RMB exchange rate index reported at 96.57 on August 29 [3][4]. Group 3: Interest Rate Differential and Market Sentiment - The interest rate differential between China and the US has narrowed significantly, with the 10-year Chinese bond yield rising over 20 basis points since June, while the US bond yield has decreased from 4.5% to around 4.2%. This has led to a reduction in the nominal interest rate differential by nearly 50 basis points [5]. - Analysts suggest that while a weak USD environment supports RMB appreciation, factors such as weak export expectations and the need for domestic demand recovery will require a steady pace of appreciation [5]. Group 4: Currency Conversion Willingness - The willingness of currency holders to convert is a critical factor, with expectations of "panic conversion" among export enterprises potentially driving the offshore RMB above 7.0 in late 2024. However, analysts believe that the likelihood of such panic conversion is low due to increased hedging by exporters [5][6]. Group 5: Central Bank's Role - The central parity rate of the RMB is a significant variable, with analysts suggesting that the People's Bank of China may adopt a gradual approach to adjusting the central parity rate to avoid excessive volatility in the stock and currency markets [7]. - The central bank's management of the RMB's central parity rate will be crucial in determining the exchange rate's trajectory, with a focus on maintaining market autonomy while preventing excessive appreciation expectations [7].

Core Viewpoint - The three pillars supporting the RMB exchange rate—China-US interest rate differential, policy risk premium, and purchasing power parity—are shifting favorably towards appreciation, with the central bank's midpoint guidance and foreign capital FOMO sentiment acting as additional catalysts [2][5]. Group 1: RMB Exchange Rate Dynamics - The RMB/USD exchange rate has experienced fluctuations this year, initially appreciating in a weak dollar environment, then depreciating due to tariff concerns, and recently regaining upward momentum [4]. - The current trend shows a convergence of the RMB midpoint, onshore, and offshore rates towards the 7.0 level, supported by both fundamental factors and event-driven catalysts [4][5]. Group 2: Interest Rate Differential - The narrowing of the China-US interest rate differential has been a fundamental basis for the RMB's appreciation over the past three months [6]. - Since July, the yield on China's 10-year government bonds has risen over 20 basis points to above 1.8%, while the US 10-year Treasury yield has decreased from 4.5% to around 4.2%, leading to a significant narrowing of the nominal interest rate differential by nearly 50 basis points [7]. - Adjusting for inflation, the actual interest rate differential has further narrowed, with China's low inflation levels contrasting with a slight rebound in US inflation [7][10]. Group 3: Policy Risk Premium - The policy risk premium for Chinese assets is decreasing, while it is rising for US assets due to concerns over the independence of the US Federal Reserve [10]. - The ongoing geopolitical tensions and the potential for a more stable RMB asset environment are contributing to a long-term reduction in China's sovereign risk premium [10]. Group 4: Purchasing Power Parity - The RMB is currently undervalued against the USD based on purchasing power parity (PPP), with the IMF indicating that 1 USD's purchasing power is equivalent to approximately 3.4 RMB [12]. - The long-standing undervaluation is attributed to limited capital account openness and concerns over China's economic transition risks, but the door for RMB revaluation is opening [12]. Group 5: Catalysts for RMB Appreciation - The central bank's midpoint rate has been set unusually strong, indicating an official expectation for RMB appreciation [18]. - Recent reports suggest the potential introduction of a RMB stablecoin, which could enhance the internationalization of the RMB and increase its attractiveness for foreign investment [20]. - Foreign capital is increasingly entering the A-share market, with significant inflows observed in August, driven by a shift in sentiment from trading to investing in Chinese assets [24]. - Export companies are accelerating their currency conversion as the cost of holding USD rises, contributing to RMB appreciation [25]. Group 6: Market Outlook - The weak dollar environment is expected to continue supporting RMB appreciation, although factors such as declining export expectations and the need for domestic demand recovery may influence the pace of appreciation [28].

Exchange Rate Trends - The RMB/USD exchange rate has shown a fluctuating upward trend since the beginning of the year, with a slight appreciation in early 2023 due to a weaker dollar, followed by a rapid depreciation in April due to tariff concerns, and a return to appreciation from May onwards[2] - As of late August, the RMB has entered a strong appreciation phase, with the onshore and offshore rates converging towards the 7.0 level, indicating support from both fundamental and policy factors[2][5] Key Drivers of RMB Appreciation - The narrowing of the China-US 10-year Treasury yield spread by nearly 50 basis points over the past three months has provided a basis for recent RMB appreciation, driven by a mild increase in China's risk-free interest rates and a decline in US Treasury yields[7] - Changes in policy risk premiums have favored the RMB, as rising uncertainty in US fiscal and monetary policies contrasts with China's efforts to reduce sovereign risk premiums through reforms[6][14] - The long-standing undervaluation of the RMB is changing, with IMF data indicating that 1 USD has a purchasing power equivalent to 3.4 RMB, suggesting the current exchange rate is undervalued by over 50%[17][20] Catalysts for Recent Appreciation - The People's Bank of China (PBOC) has released strong appreciation expectations through its midpoint rate, influenced by geopolitical negotiations and domestic stability considerations[3][31] - The bullish trend in the A-share market, with the Shanghai Composite Index rising over 8% and the ChiNext Index over 20% in August, has led to increased foreign investment and demand for RMB[40] Future Outlook - The weak dollar environment is expected to continue supporting RMB appreciation, but factors such as weak export expectations and the need for domestic demand recovery suggest a stable appreciation pace is more beneficial for fundamental recovery[47] - The importance of the RMB against a basket of currencies is anticipated to rise, reflecting the need for a more balanced exchange rate strategy[49]

Report Industry Investment Rating No relevant content provided. Core Viewpoints - The sentiment of non - banking institutions is not pessimistic, but the number of bond - receiving institutions during bond market corrections is gradually decreasing. The bond market fluctuated this week, with the yields of 10 - year and 30 - year treasury bonds rising in the valuation curve. The spread between 250210 and 250215 has widened by about 2bp [2][11]. - There are three changes in institutional behavior this week: frequent bond market corrections but strong buying power; on Thursday, funds were the main sellers, but the net selling volume was not large, and the lack of counterparties led to a significant interest rate increase; attention should be paid to the possible spread compression of the ultra - long bond 25 Special 06 [3][4]. Summaries According to the Directory 1. This Week's Institutional Behavior Review - **Yield Curve**: Treasury bond yields declined at the short end and rose at the long end. For example, the 10Y yield rose 6bp, and the 30Y yield rose 6bp. The short - end yields of CDB bonds declined, with the 1Y yield down about 4bp [14]. - **Term Spread**: The interest rate spreads of treasury bonds and CDB bonds showed differentiated trends, with the short - end spreads widening. For treasury bonds, the 1Y - DR001 spread rose about 14bp, and the 5Y - 3Y spread widened 3bp. For CDB bonds, the 1Y - DR001 spread rose about 6bp, and the 3Y - 1Y spread widened 3bp [16][17]. 2. Bond Market Leverage and Funding Situation - **Leverage Ratio**: It decreased to 106.84%. From August 25th to August 29th, the leverage ratio first increased and then decreased during the week [20]. - **Average Daily Repo Turnover**: From August 25th to August 29th, the average daily turnover of pledged repurchase was about 7.1 trillion yuan, a decrease of 0.06 trillion yuan from last week. The average daily turnover of overnight pledged repurchase was 6.0 trillion yuan, a decrease of 0.23 trillion yuan month - on - month. The average overnight trading ratio was 85.46%, a decrease of 2.29pct month - on - month [27][28]. - **Funding Situation**: Bank funding supply first increased and then decreased. On August 29th, the net funding supply of large - scale and policy banks was 4.015 trillion yuan; the average daily net funding inflow of joint - stock banks, city commercial banks, and rural commercial banks was 0.58 trillion yuan, and the net inflow on August 29th was 0.81 trillion yuan. The main funding inflow party was funds, and the funding supply of money market funds fluctuated and increased [31]. 3. Duration of Medium - and Long - Term Bond Funds - **Median Duration**: The median duration of medium - and long - term bond funds decreased to 2.77 years (de - leveraged) and 2.95 years (leveraged). On August 29th, the median duration (de - leveraged) decreased by 0.04 years compared to last Friday, and the median duration (leveraged) decreased by 0.16 years [43]. - **Duration by Bond Fund Type**: The median duration (leveraged) of interest - rate bond funds decreased to 3.75 years, a decrease of 0.16 years compared to last Friday; the median duration (leveraged) of credit bond funds decreased to 2.72 years, a decrease of 0.12 years compared to last Friday [46]. 4. Comparison of Category Strategies - **China - US Yield Spread**: The overall spread widened. The 1Y spread widened by 10bp, the 2Y spread widened by 14bp, and so on. From a percentile perspective, the 1Y spread rose to the 47% percentile [51]. - **Implied Tax Rate**: The short - end was differentiated, and the long - end narrowed. As of August 29th, the 1Y spread between CDB bonds and treasury bonds narrowed by 3bp, and the 10Y spread narrowed by 6bp [52]. 5. Changes in Bond Lending Balances On August 29th, the lending concentration of the active 10 - year treasury bond, the second - active 10 - year treasury bond, the active 10 - year CDB bond, and the active 30 - year treasury bond increased, while the lending concentration of the second - active 10 - year CDB bond decreased. By institution, the lending concentration of large - scale banks and other institutions increased, while that of small - and medium - sized banks and securities companies decreased [53].

Core Viewpoint - The Chinese yuan has strengthened against the US dollar, with a notable increase of 0.84% in August, marking the largest rise in three months, driven by a weaker dollar and a strong A-share market [1][2][3]. Exchange Rate Movement - As of August 29, the onshore yuan reached a nearly ten-month high at 7.133 against the dollar, while the offshore yuan briefly surpassed 7.12 [1][2]. - The People's Bank of China set the yuan's central parity rate at 7.103, a rise of 33 points from the previous day, indicating the strongest adjustment in nearly a year [1][7]. Factors Influencing Yuan Strength - External factors include a weak US job market, which has increased expectations for Federal Reserve rate cuts, leading to a decline in the dollar index [3][4]. - Internal factors involve narrowing interest rate differentials between China and the US, along with supportive government policies for the tech sector, which have boosted the A-share market [4][5]. A-Share Market Performance - In August, the Shanghai Composite Index rose by 7.97%, the Shenzhen Component by 15.32%, and the ChiNext Index by 24.13%, reflecting a positive market response to recent policies [5]. - Despite a net outflow of over 10 billion yuan from southbound funds on August 28, the overall trend indicates capital inflow into the domestic market [5]. Future Outlook - Analysts predict that the yuan may break the 7.00 level against the dollar by year-end, supported by reduced demand for dollars and increased demand for yuan [2][8]. - The current market conditions show approximately $350 billion in pending currency conversion, which could further support the yuan's appreciation [8]. Regulatory Perspective - The strong setting of the yuan's central parity rate suggests regulatory support for a stronger yuan, which could enhance domestic consumption and positively impact the A-share market [7][8].

Group 1 - The political pressure from Trump on the Federal Reserve to lower interest rates has caused significant market volatility, leading to a sharp decline in the US dollar index and a rise in gold and oil prices [1][3][5] - The urgency for Trump to push for lower interest rates is attributed to the high fiscal pressure on the US, with annual interest payments on national debt reaching $1.2 trillion, which is seen as a burden on the national budget [5][9] - The depreciation of the US dollar has led to a strengthening of the Chinese yuan, with the yuan's midpoint reaching an eight-month high, prompting a wave of capital inflow back to China as businesses seek to capitalize on favorable exchange rates [7][11] Group 2 - The global financial landscape is shifting, with countries like China and Japan reducing their holdings of US Treasury bonds, indicating a potential decline in confidence in the US dollar as a safe-haven currency [7][9] - The recent surge in foreign investment in the Chinese stock market, particularly in technology and renewable energy sectors, is driven by the narrowing interest rate differential between China and the US, which has decreased from 280 basis points to 180 basis points [9][11] - The increasing use of the yuan for cross-border settlements, now exceeding 50%, suggests a gradual shift in global financial dynamics, challenging the dominance of the US dollar [11]

Group 1 - The core viewpoint of the article emphasizes the urgency for the U.S. to lower interest rates in September, which is crucial for both domestic financial costs and U.S.-China trade relations [1][3] - Trump is anxious about the Fed's decision on interest rates, indicating that if the U.S. fails to lower rates as expected, it could hinder strategic cooperation with China [1][3] - The article discusses Trump's recent actions, including the dismissal of Fed Governor Lisa Cook, which he claims is due to alleged financial misconduct, highlighting his aggressive approach to influence the Fed [3][6] Group 2 - The article notes that Trump's dismissal of Cook may face legal challenges, suggesting potential disputes over the authority of such actions [6] - It is indicated that Trump is optimistic about achieving a second round of interest rate cuts, which could significantly impact the macroeconomic landscape and facilitate capital flow back to China [6][7] - The article outlines the importance of the second round of rate cuts compared to the first, emphasizing that the current limited space for rate reductions in China complicates maintaining interest rate differentials with the U.S. and Europe [7][8]

Group 1 - The Federal Reserve's signal of interest rate cuts in August 2025 is a strategic move by the Trump administration to alleviate the pressure of $37 trillion in debt interest and counter inflation risks from the tariff war [1] - The influx of international capital into China is expected to accelerate, particularly in infrastructure and technology sectors, due to the excess liquidity of the US dollar [3] - The recent suspension of US delivery services by New Zealand, India, and five EU countries is a collective response to the US's "America First" policy, indicating rising global tensions [3] Group 2 - The US has imposed sanctions on two Chinese companies under the pretext of assisting Iranian oil transport, which is a tactic to test China's limits in energy security [5] - The abrupt policy change regarding small parcel shipping has disrupted the cross-border e-commerce sector, with platforms like Amazon and eBay warning of potential shortages during the holiday shopping season [6] - The share of the US dollar in global reserve currencies has dropped to 58%, the lowest in 20 years, reflecting the diminishing influence of unilateralism and the potential for a shift in global financial systems [8]

Core Viewpoint - The relationship between U.S. interest rate changes and China's monetary policy is complex, and the assumption that China should simply "loosen" its monetary policy when the U.S. lowers rates is overly simplistic [1][3][12]. Group 1: Impact of U.S. Interest Rate Changes - When the U.S. Federal Reserve lowers interest rates, it increases global dollar liquidity, but this does not automatically lead to capital flowing into China [3][5]. - Conversely, when the U.S. raises interest rates, it attracts capital back to the U.S., putting pressure on China and potentially leading to significant capital outflows [5][10]. - In 2016, the capital outflow from China reached approximately $485.3 billion due to U.S. interest rate hikes, highlighting the impact of U.S. monetary policy on China's financial stability [5][10]. Group 2: China's Monetary Policy Response - China's monetary policy is not simply reactive; it requires careful consideration of various factors such as the China-U.S. interest rate differential, expectations for the yuan's exchange rate, and capital control policies [9][10]. - In 2022, during a period of U.S. monetary easing, China adopted a strategy of increasing exchange rate flexibility and controlling capital inflows while encouraging moderate capital outflows, rather than blindly loosening monetary policy [7][10]. - The complexity of capital flows means that a simplistic view of U.S. interest rate changes leading to immediate policy shifts in China is misleading [12][14].